A Company Issues 6%,5 Year Bonds with a Par Value

question 205

Essay

A company issues 6%,5 year bonds with a par value of $800,000 and semiannual interest payments.On the issue date,the annual market rate of interest is 8%.Compute the issue (selling)price of the bonds.The following information is taken from present value tables:
$\begin{array}{llr} \text {Present value of an annuity for 10 periods at \( 3 \% \) } &8.5302\\ \text { Present value of an annuity for 10 periods at \( 4 \% \) } &8.1109\\ \text { Present value of 1 due in 10 periods at \( 3 \% \) } &0.7441\\ \text { Present value of 1 due in 10 periods at \( 4 \% \) } &0.6756\\\end{array}$

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Definitions:

Economies of Scale

Refers to the cost advantage that arises with increased output of a product, leading to a reduction in the per-unit cost.

Marginal Cost

An alternative phrasing expressing the additional cost incurred from the production of the next unit of output.

Average Total Cost

The cost per unit is calculated by dividing the overall production cost by the quantity of units produced.

Average Variable Cost

The total variable cost divided by the quantity of output produced; it shows the variable cost per unit of output.